The Bank of England is now completing the dismantling of the emergency bond-buying program it initiated to calm financial markets following Liz Truss’s devastating mini-budget last fall.
Three months after being forced to intervene on markets to stop a run-on pension funds, Threadneedle Street announced that it had sold £19.3bn worth of government bonds.
Bloomberg reports that the Bank made a profit from the disposals of approximately £3.5bn. The sale process was completed on Thursday, despite a recent rise in the prices of government bonds. It began on 29 Nov.
After the mini-budget revealed by Truss’s former chancellor Kwasi Kwarteng caused financial turmoil and fears of a 2008-style financial crises, the central bank intervened with a promise that it would pump £65bn into the financial markets.
The Bank stated that the purchases were made in order to restore market order following the UK gilt market’s dysfunction and to reduce contagion risk to credit conditions for UK households.
The financial assets of pension funds for retired British citizens were under severe pressure after bond markets plunged sharply following the announcement on tax and spending. The Bank warned that “large numbers” could go bust if no intervention was made.
Andrew Bailey, the Bank’s governor has linked market chaos to mini-budget. This is despite attempts by the Truss Administration to link global factors to the sharp rise of yield (or interest rate) on UK government bonds.
In advanced economies, bond yields have been increasing as a result of high inflation and major central banks raising interest rates. However, City analysts stated that Britain was an international outlier. The country suffered a “moron premium”, as global investors lost faith in the Truss government’s ability to manage its economy and finances.
The yield on 30-year UK government bond yields reached its highest level since 2008’s financial crisis. It rose by more than 1 point in just days to almost 5%, after the mini-budget. Since then, yields have fallen to 3.7%.
Threadneedle Street stated that it sold £12.1bn long-dated, conventional gilts and £7.2bn index-linked gilts.
The Bank is also selling billions in government bonds purchased under its quantitative ease scheme. This was established after 2008’s financial crisis and expanded during the Covid pandemic. It is designed to support the economy.
The Bank announced in December that it had reduced the total assets purchased under quantitative easing to £844bn. This is a decrease of the £895bn peak. Threadneedle Street will suffer a significant loss due to the QE scheme’s demise. Estimates show that taxpayers are responsible for more than £100bn.